Estate Tax Changes

Welcome back, and Happy New Year everybody! To kick things off, I thought I'd share an advisory we sent to our clients regarding the tax legislation passed by Congress just before the holidays:

The just-enacted Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) favorably addresses uncertainties lingering in our federal estate, gift and generation-skipping transfer tax regimes since 2001. Absent Congressional intervention, the Act expires at the end of 2012. In the interim, however, the Act may produce planning opportunities for certain individuals.

Here is a summary of the most significant changes to the federal gift, estate and generation-skipping taxes for 2011 and 2012:

• The rate for the estate, gift and generation skipping transfer taxes is 35%.
• The estate and gift tax regimes are “reunified,” with a combined tax-free allowance of $5 million ($10 million for a married couple). This means that there will be an increase from $1 million to $5 million in the tax-free amount for lifetime gifts. This will create enhanced planning opportunities in states such as New York which have no gift tax.
• The Act affords “portability” of a deceased spouse’s unused tax-free amount to the surviving spouse. If a spouse does not use some or all of his or her tax-free amount of $5 million, the surviving spouse may use the remainder, ensuring that $10 million per couple will be exempt from the unified gift and estate tax during the period covered by the Act.
• The generation-skipping transfer tax exemption is also set at $5 million.
• The $5 million tax-free amounts will be indexed for inflation after 2011.

The Tax Act resolves uncertainties in the federal gift, estate and generation-skipping tax regimes in effect in 2010 as follows:

• The estate tax for 2010 decedents is restored, with a tax-free amount of $5 million and a 35% tax rate. Importantly, however, 2010 estates may elect out of the estate tax regime entirely and into an income tax regime of modified “carryover” basis.
• The generation-skipping transfer tax administrative rules are applicable to 2010 generation-skipping transfers, but no GST tax is payable on 2010 transfers.
• The lifetime gift tax exemption remains $1 million in 2010, with a 35% tax rate for gifts in excess of that amount.

Lastly, for those concerned about changes to the law for grantor retained annuity trusts (“GRATs”), we can report that the Tax Act left this valuable estate planning strategy unscathed.